At the gaming industries big convention, E3, a lot of the buzz was software driven. The chatter and talk was about the games on the horizon. Who’s building what, how well it plays, how fast, and how fun. Looking to last month, the industry didn’t generate the same kind of excitement in the retail stores during May.

According to the latest batch of retail data released Thursday by tracking firm NPD, sales fell off 23%, to $863.4m on the month. It was the third month of declining sales activity and the first month the industry turned out a revenue result below $1b in total since August of 2007.

Normally at Metue.com we publish a review of the NPD findings right away. This month, we took a few extra days to give it a closer look.

May is a historically weak month for games and to a certain extent, some weakness was expected. NPD and a number of industry analysts had largely predicted a down result. They note that year over year comparisons in the industry often don’t match because of differing product supply levels and the variable scheduling of when hotly anticipated new software releases hit the market. One year could be boosted by a just released blockbuster (like last year) while another coasts on solid (but not comparable) sales of older catalog hits.

In May, those cyclical elements and the quality of one year’s slate versus another were surely in play, but we think there may be clues in the data that show the results are a little more complicated.

One of the indicators might be Wii sales rates. The hardware subsector of the industry was off 30% in May to $302.5m. As has been usual, Nintendo led the ranks with top of the list sales for the DS and Wii. In May, however, only the DS showed year over year sales growth. Wii sales, in contrast, showed signs of weakness for one of the first times. Though still besting the competition easily, the otherwise unflappable console saw sales shrink 57% year over year. Gamasutra, in their more detailed analysis, noted that on a weekly basis, Nintendo Wii sales barely topped 72k units. Since the console debuted, that’s only happened a couple times and the prior shortfalls were a factor of limited supply and that’s no longer believed to be an issue. So what’s happened here? We’re not sure.

It’s not clear if weaker May sales were a sign demand for the Wii is settling down but that could be the case. Nintendo has an installed base of more than 20m Wii’s in the U.S. and it reached that level faster than any other console ever has. Even so, there’s always a plateau, that point at current pricing where demand starts to slow. Is that where we are? It’s possible. It’ll take another month or two of data to get a better sense if that’s the case (and if so, whether the Wii’s massive contribution to monthly hardware sales will be offset by other products, or even stimulated back with potential price cuts) – so more data is needed to know whether May results were an anomaly or the start of new pattern but it’s something to watch for.

On the software side of the industry, in May, total software sales were reasonably solid; off 17% year over year with a weaker slate than was in the market then. The results may even be hiding some positive news.

When we looked at the top ten list for Metue’s analysis of the NPD data, we lumped the software titles from the list into three groups: the top three sellers, the middle four and the bottom three. All did well to make the top ten but we looked at the average sales for each of these groups as a way of mitigating the impact of a new blockbuster release that might in one year drive software total sales results, or grab a top slot with a performance that skews the result (taking dollars that might have gone elsewhere). We also looked at what we call, “the entry threshold” – that’s the minimum number of unit sales necessary to break into the top ten listing for any given month. The idea was to get a sense of how consistent demand was for range of top titles in a month, not just the one or two major hits that had all the buzz.

Looking at the comparative averages across these groups (see table) and the Entry Thresholds for January to May in 2008 and 2009, we noticed some patterns.

First, breaking into the top ten has been relatively easy this year compared to last. From Jan to April, the number of units sold in order to place in the top ten was less than that in 2008 (data from prior NPD reports can be found in the links below). In April it took only an abysmal 91k units compared to 141k to place tenth the year before. That would seem to fit with this year’s slower start. (The industry is off 7.1% YTD). But the good news? May, was the first month where this trend corrected. In May the number ten seller sold 109.8k units, compared to 102 the year before. It’s a small shift, but it is probably a positive sign.

Reinforcing that view, the same trend was largely matched when looking at the average sales across the bottom three slots in the top ten list as well. Through much of this year, unit sales were substantially weaker than last (March, excepted). But May marked a change and an improvement.

Accounting for Hits March, April and May of 2008 had some incredibly strong software hits to rely on. These games resulted in massive unit sales. 2009’s product slate has not delivered anything near the same level. To account for that, we disregarded the top three titles and instead looked at the unit sales for the middle four games (slots 4,5,6, and 7) in the top ten ranking. From this vantage point, 2009 has generally been better and May was a relatively even result after a weak April. What does this mean? We think it means two things. First, when there’s a big hit, money is diverted away from slightly lesser sellers. As such, the middle tier should have been better this year, and is. By the same token, we think a strong showing for the middle tier of the top ten is a sign customer appetite for older catalog titles (or games at reduced prices) likely remains strong, even if new releases aren’t quite up to par on a year over year basis.

This second view seems to be further supported by the staying power (or lack thereof) of new releases versus older titles in the monthly top tens, especially when looking at titles on a per platform basis. In May, six of the top ten titles were new to the overall top ten list. The four stalwarts from the month before were all Nintendo evergreens – the titles that always seem to stick around – Wii Fit, Wii Play, Mario Kart and Pokemon. Capcom’s Resident Evil 5, which led the list in March and cracked the top ten in April, didn’t make the overall top twenty in May.

Per Platform data really illustrates this dynamic: For the Wii, seven of the top ten titles on the platform were carryovers from last month’s top ten. Apart from the three new entries, all but Ubisoft’s Gold’s Gym Cardio Workout title (6th on the Wii this month, and 7th last) were released in 2008 or 2007. For the NDS, same story – only three of the top ten titles on platform were 2009 releases. The other seven were introduced between 2004 and 2008. (Note: GAMASUTRA has published NPD’s per platform top ten listshere for those who want to see which titles are selling).

For the Xbox 360, again, same story. The platform top ten had five carryovers from April but only five games out of the top ten were released this year. The other five debuted in 2007 and 2008.

The PS3 was the only console platform seeing greater uptake on top new releases in May. Five games broke into the top ten in May that weren’t there last month and eight of the top ten sellers were introduced between February and May of this year.

So older catalog titles seem to be carrying the industry and the PS3, while seeing more new entries, may be held back by the smaller installed base of the console. At least, that’s what it looks like.

Recapping a few of the other elements of the overall May results, Nintendo continued to perform well as a publisher. The company led the field with five homegrown titles in the top ten, and six of the ten games were published for Nintendo hardware. By platform, the Xbox 360 and the PS3 each accounted for two, rounding out the list.

By publisher, behind Nintendo’s 5, Sony, EA and Activision each had one representative. THQ led the field of independents (and topped the list) with its UFC 2009: Undisputed title. The game grabbed first and fourth (Xbox 360 and PS3, respectively). Tallied cross platform, it moved more than 1m units. But will it still be in the overall top ten for June, and likewise will other new entrants like Sony’s “Infamous” or Nintendo’s “Punch Out?” or will old standby’s climb back up?

The next two months should give a good sense of where the industry is heading.